Lynn Strongin Dodds looks at how the industry has coped and what tools and strategies they will need for the future.
Despite advanced technology and sophisticated modelling no one predicted a black swan event such as Covid-19. This explains why business continuity or disaster recovery plans were not fit for purpose. Navigating the future will be challenging but many of the issues facing the buyside are deep rooted.
There is no doubt though that the volatility in the first quarter took its toll. Data from Refinitiv showed that assets under management in the European fund industry slid from €12.3trn to €10.6trn mainly due to the performance of the underlying markets and estimated net outflows of €125.9bn. However, the buyside had been buckling from lower returns due to the historically low interest rate environment, the ongoing shift to passive and alternative asset classes and slowing organic growth. This is not even mentioning continued fee pressure and aggressive competition from within and outside the industry.
In many ways, Covid-19 accelerated trends that were already there,” says Octavio Marenzi, CEO and co-founder of consultancy Opimas. “There have been cost pressures and the shift to passive from active are long-term trends. This will not change, although we may see a shift to performance-based compensation from management fees. I also think that the environment will accentuate consolidation as firms look for scale.”
The first wave saw significant tie-ups with the £11bn merger between Standard Life and Aberdeen Asset Management, the $6bn union between Janus Capital and Henderson Global Investors, and Amundi’s €3.5bn takeover of Pioneer Investments. More recently, the activity has been on the smaller to mid-size end of the scale such as Liontrust’s purchase of Neptune and Merian Global Investors, the £26.4bn boutique spun off from Old Mutual, acquiring Kestrel Investment Partners’ multi-asset business.
M&A will only be one part of the equation going forward. On the big picture level, firms that want to survive will need to refocus their product portfolio, transform cost structures and invest in innovative technologies that will drive the business forward over the long term, according to the report from Boston Consulting Group (BCG) – Protect Adapt and Innovate. Information will continue to be key and firms can carve out an edge by building data science capabilities that gather, clean, synthesise, and visualise vast amounts of client information.
A different kind of crisis
“The pandemic has only intensified the industry’s challenges,” says Lubasha Heredia, a New York–based BCG managing director & partner, and co-author of the report. “After the financial crash in 2008, the asset management industry benefited from a market rebound that produced the longest bull market in history and prompted the rise of passive assets and winner-take-all phenomenon. We expect this phenomenon to continue in response to the early 2020 crisis.
She adds, “firms are focused on recovering flows and profitability and we expect to see accelerated digitisation, increased M&A activity and product innovation. I think firms that will suffer the most will be those in the middle because they do not have the scale or products that can consistently outperform the market.”
Not surprisingly, those that do not embrace greater automation and cutting-edge technology such as artificial intelligence and cloud-based systems will be left behind. This does not only mean developing innovative more client focused products but also strengthening the back and middle office backbone to ensure there is the operational resiliency that is needed for current and future shocks.
As Matt Stauffer, Managing Director, head of institutional trade processing at DTCC, notes, “The buyside is focusing on the challenges ahead leading them to reallocate their resources to ensure that they are prepared for a potential second wave of disruption,” says “We will likely see more attention paid to operational efficiency and a greater push towards automation as a result.”
Dan Shepherd, chief executive of BTON Financial, the independent outsourced dealing desk for asset managers, adds, “Covid focused the mind in terms of business continuity planning and the impact of the failure to plan. I think this will lead to an increase in automation and leveraging technology in general to improve processes and workflows. I also expect to see an increase in outsourcing especially in trading. In the past, fund managers may have had to justify a reason to outsource the function but now they may need a reason to keep it in-house.”
Buyside firms will also have to up their game, for example, in their usage of cloud-based systems as well as artificial intelligence (AI) that can capture more complex, non-linear patterns in asset behaviour and real time algorithms which adapt to changing market conditions. Data, of course, will be key. However, the latest Data Operating Models Study by Alpha FMC showed that low staffing levels, lack of senior oversight and budget constraints are holding back asset managers from developing comprehensive data strategies that can help sharpen their edge.
Canvassing 33 asset managers with a combined AUM of £6.9trn, the report found that they see big data analytics and artificial intelligence (AI) as critical to improving investment returns, as well as helping them differentiate against competition by enhancing customer experience, ensuring customer retention and, crucially, cutting costs. Structural barriers, legacy technology and lack of commitment though are preventing the industry from leveraging data to improve their processes.
“The most important thing is that firms have an infrastructure that has the ability to scale quickly, deal with market disruptions, a lack of liquidity and increased credit & counterparty risk,” says Brad Foster, global head of enterprise content at Bloomberg. “In terms of data, fund managers need to take a more holistic view and look at ways to better use and extract the value of from the data they can have access to.”
WFH (working from home)
The buyside will also have to be more adaptable in their working practices. Traditionally, the industry has been wedded to the tried and tested pyramid structure with the portfolio managers or the investment decision makers at the top supported by banks of sales and distribution people in the middle with a host of administrators at the base. The old model was broken when Covid struck and seemingly overnight, firms were forced to transition and equip employees to a working from home environment.
Although lockdown is easing, the picture is mixed in the UK and Europe with some fund managers opting to return to the office albeit not in full capacity while others are more reluctant for fear of a second wave. For example, Standard Life Aberdeen, has told its 4,900 UK workforce that the majority of them should continue to work from home for the rest of 2020 while, M&G Investments, Jupiter, Janus Henderson and Invesco have said that their UK offices would remain closed for the time being. Amundi Asset Management, on the other hand, is expecting to have half its staff return between July and September, while LGIM, the UK’s largest asset manager, said most of its staff will continued to work from home, with limited reoccupation in London, Cardiff and Hove.
Those firms that had tightly integrated systems and cloud-based technology were best placed to have made the transition from the office to working from home, according to Chris Hollands, head of European sales and account management at OEMS provider TradingScreen. “In general, there also needs to be good communication between the execution traders and portfolio managers, as well as a strong audit trail.”
Looking ahead, it is hard to predict the long-lasting impact of Covid-19 on office life but market participants expect there to be a fundamental mind shift especially as productivity has not suffered and in some cases has risen. The most likely scenario will be a hybrid model whereby the week is split between working from home and the office. This is because although people have adjusted, there is still no replacement for human contact.
As Chris Dyer, Direct of Global Equity and Portfolio Manager at Eaton Vance and Calvert notes, “Although the industry has managed to adapt to working from home, it is difficult to replicate office life, employee communication and collaboration. We have daily calls throughout the day with teams and individuals but it is not the same as in person. What is important is to be proactive and ensure that you have the right investment philosophy and culture.”